NewRetirement Retirement News Digest : Economics and the Market

Fidelity Says 401(k) Accounts Recover From 2008 Drop

jberman — Sat, 21 Nov 2009 10:33:00 GMT

Bloomberg, November 19th, 2009

Fidelity Investments said the average balance on customers’ 401(k) retirement accounts has returned to September 2008 levels on contributions and third- quarter investment gains.

Account balances in plans for U.S. workers benefited from the 22 percent year-to-date gain in the Standard & Poor’s 500 Index along with continuing employee contributions, the Boston- based firm said in a statement today, after reviewing 11 million accounts managed by Fidelity.

“The third quarter actually moved us into positive territory,” said Michael Doshier, vice president of Fidelity’s workplace investing group. “I think that surprised, if not everybody, a lot of people.”

Average account balances rose 13 percent to $60,700 from June to September, Doshier said, and are up 28 percent from $47,500 at the end of March. The gains include investment returns, employee contributions and employer’s matches. A typical 401(k) holds a mix of equities, bonds and cash.

The average balance was $58,400 at the end of September 2008. The S&P 500 Index lost 42 percent from Oct. 1, 2008, until touching a low on March 9. The latest figures are 12 percent below the average balance of $69,200 at the end of 2007, according to an earlier Fidelity survey.

Twenty-seven percent of companies that suspended their 401(k) matching contributions are beginning to make those payments again, according to Fidelity, the largest U.S. administrator of 401(k) plans. Companies have either reinstated the match or plan to do so in the next 12 months as the economy recovers, Fidelity said.

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Stocks: Five Market Mistakes to Avoid

jberman — Tue, 10 Nov 2009 10:21:00 GMT

Business Week, November 8th, 2009

Markets may have rebounded in 2009, but individual investors are still edgy and shell-shocked.

Even as the broad Standard & Poor's 500-stock index remained up 56% since March, the U.S. unemployment rate crept above 10%, according to a Labor Dept. report released Nov. 6. "I don't think many people are feeling very relieved," says Milo Benningfield of Benningfield Financial Advisors in San Francisco. Many people believe the "[stock market rally] can't last," he says.

These remain risky times, and the last few years have demonstrated to investors the high cost of doing the wrong thing. Against that nervous backdrop, BusinessWeek asked financial advisers what common mistakes investors are making, and how to avoid them:

1. Don't Jump In All at Once
A little optimism can be a dangerous thing. Individual investors are notorious for selling stocks when markets have already dropped and buying after they have risen. And, says Susan Elser of Elser Financial Planning in Indianapolis, "Selling low and buying high is the worst thing you can do for your returns."

Among those who stayed away from stocks and other risky investments for the past year, many are irked to have missed out on the recent rally. But is now the right time to buy again?

Don't rush back into the market because you worry you've missed the rally. "The biggest mistake is [to try] to make everything up at once," says Micah Porter, president of the Minerva Planning Group in Atlanta.

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3 steps to a better retirement

jberman — Fri, 06 Nov 2009 01:57:00 GMT

CNN Money, November 3rd, 2009

Question: My husband and I are in our late '50s and haven't put anything away for retirement, although we do own our home. We figure we'll work another 10 years or so before retiring. Do you have any helpful suggestions for us so we won't have to live solely on Social Security? --Peggy, Rockvale, Colorado

Answer: Sure, I've got a few recommendations. But since there are no secret formulas or magical fixes for making up for a lifetime of saving little or nothing (aside from what you have in home equity), I doubt that most of them will come as blinding revelations to you.

What you may find surprising, though, is how much you can still improve your retirement prospects if you really commit, even though you're getting a relatively late start.

1. Save, save, save

The first thing you've got to do is start socking away as much as you possibly can. Ideally, you'll do this saving in 401(k)s, IRAs or other tax-advantaged retirement accounts, although barring that, plain-old taxable accounts will do.

Granted, starting from scratch in your late 50s isn't an ideal position to be in. But it's not hopeless either; you still have time to accumulate enough of a retirement stake to make a difference in your eventual standard of living.

You say that you expect to work about 10 more years. Even if you can manage to save just $250 a month over that period, you would have a nest egg worth roughly $43,000, assuming a 7% annual return. If you can boost the amount you put away to $500 a month, you'll end up with twice that amount, or $86,000, and if you manage $1,000 a month, you'll have $172,000.

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Ways to Ease the Pressure of a Cash Crunch

jberman — Thu, 05 Nov 2009 10:21:00 GMT

The New York Times, October 16th, 2009

MANY retirees are in a cash crunch — with a lower income stream from their investment portfolios, personal expenses that are higher than expected, or both.

While most assets can be used to generate liquidity, deciding what to do requires careful deliberation; there are many pitfalls. Here are the most commonly used approaches for people who find themselves coming up short during retirement, and an analysis of their pros and cons.

CASH FROM YOUR HOME Mortgage rates are so low that many financial planners say the best way to raise money is to take out a conventional mortgage or a home equity line. But reverse mortgages, which allow homeowners who are at least 62 to borrow against the equity in their homes and receive regular monthly payments, are often seen as a last resort. Some financial planners even advise retirees to sell their investment portfolios or cash in their life insurance policies before taking out a reverse mortgage.

Unlike traditional mortgages or home equity lines, a reverse mortgage requires no payments until the borrowers die or no longer use the home as their primary residence. Then the mortgage must be paid in full. Closing costs, fees and interest rates are also generally high, reducing the amount of money that borrowers can leave to their heirs. Yet if retirees have exhausted other options, a reverse mortgage may be worth considering, especially for those with high medical expenses, said Alicia H. Munnell, the director of the Center for Retirement Research at Boston College. “If you’re not planning on leaving your house to a child, then this is an option, rather than depriving yourself during your lifetime,” she said.

TAPPING LIFE INSURANCE Retirees often decide that they no longer need life insurance once their children are grown. If they own whole-life policies, which have an investment component, and want to drop them, they can either cash them in with their insurers or sell them to investors, who will pay the premiums until the policyholders die. An advantage of dealing with investors is that you can sometimes get a better deal than from the insurance company.

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Lawmakers Target Medicare and Medicaid Fraud

jberman — Fri, 30 Oct 2009 01:45:00 GMT

The Wall Street Journal, October 28th, 2009

The federal government needs to further step up efforts to fight Medicare and Medicaid fraud to generate more savings to help pay for a health-care overhaul, lawmakers said Wednesday.

"The scale of health care fraud in America today is staggering," Senate Judiciary Committee Chairman Patrick Leahy (D., Vt.) said at a hearing. "Now, as health care reform moves through the Senate, I want to make sure we do all we can to tackle the fraud that could undermine efforts to reduce the skyrocketing cost of health care."

Health-overhaul legislation moving through Congress contains provisions to beef up the government's antifraud effort. The U.S. loses at least $60 billion to health-care fraud every year, and some estimates put the cost as high as 10% of the nation's total health-care spending, which exceeds $2 trillion. Medicare, the federal insurance program for the elderly and disabled, and Medicaid, the federal-state program for the poor, are especially susceptible. The government has announced a series of indictments on Medicare and Medicaid fraud in the past two years, including indictments earlier this week involving a Mississippi medical clinic.

Sen. John Cornyn (R., Texas) said government officials still need to figure out why Medicare and Medicaid have a higher rate of fraud than private insurers, especially since Congress is considering creating a public-insurance program. "I'm sure we'll never have enough good guys to outnumber the bad guys in this area." Mr. Cornyn said, asking Health and Human Services and Justice Department officials: "What can you do to reduce it?"

Bill Corr, deputy HHS secretary, said HHS and the Justice Department are making progress, especially by using specialized teams to ferret out fraud. But he agreed that the task is huge. Medicare alone, he testified, receives 4.4 million claims each day, which have to be paid between 14 and 30 days.

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Universal Coverage: A Revenue Windfall?

jberman — Tue, 27 Oct 2009 00:54:00 GMT

The New York Times, October 24th, 2009

Arthur Ullian is president of the National Council on Spinal Cord Injury and co-author of two studies in the Proceedings of the National Academy of Sciences on the economics of health care. In a forthcoming analysis, Mr. Ullian, the demographer Kenneth G. Manton of Duke University, the statistician Dennis Tolley of Brigham Young University and others conclude that expanded access to health care will generate revenue and savings for the federal government that are not accounted for in official cost estimates. Mr. Ullian spoke with the freelance writer Anne Underwood.

You and your co-authors say that over the long term, improved health care will actually contribute billions of dollars to the Treasury, even without the taxes and service cuts that Congress is considering in various legislative proposals. How is that possible?

There are offsetting dollar gains that Congress and the Congressional Budget Office aren’t taking into account.

But the C.B.O. projects costs of around $800 billion over 10 years for the Senate Finance Committee bill, and so far that’s the cheapest of the proposals.

The projections are an enormous percent of G.D.P., and they’re not sustainable, which is what everyone is yelling about. But that’s because no one is taking into account the health improvements that will result from covering millions of the uninsured.

How does that help?

There are two parts to this theory. The first relates to the expansion of the labor force. We know from the National Long Term Care Survey that as a result of improvements in health care, active life expectancy in the United States has been increasing. In 1982, 74 percent of those aged 65 and older were healthy. By 2004, that had gone up to 81 percent. Projections for 2014 are between 84 and 85 percent.

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Medicare Fraud: A $60 Billion Crime

jberman — Tue, 27 Oct 2009 00:50:00 GMT

CBS News, October 25th, 2009

Of all the problems facing the United States right now, none are more important than health care.

President Obama says rising costs are driving huge federal budget deficits that imperil our future, and that there is enough waste and fraud in the system to pay for health care reform if it was eliminated.

At the center of both issues is Medicare, the government insurance program that provides health care to 46 million elderly and disabled Americans. But it also provides a rich and steady income stream for criminals who are constantly finding new ways to steal a sizable chunk of the half trillion dollars that are paid out each year in Medicare benefits.

In fact, Medicare fraud - estimated now to total about $60 billion a year - has become one of, if not the most profitable, crimes in America.

This story may raise your blood pressure, along with some troubling questions about our government's ability to manage a medical bureaucracy.

If you want to find Medicare fraud, the first place you should look is South Florida, where 60 Minutes and correspondent Steve Kroft were told it has pushed aside cocaine as the major criminal enterprise.

It's a quiet crime - there are no sirens or gunfire. The only victims are the American taxpayers, and they don't even know they are being ripped off.

FBI Special Agent Brian Waterman, who 60 Minutes rode with for several days, told us the only visible evidence of the crimes are the thousands of tiny clinics and pharmacies that dot the low-rent strip malls.

You don't even know they're there because there's never anyone inside. No doctors, no nurses and no patients.

"This office number should be manned and answered 24 hours a day," Waterman explained, standing outside one of those small, unstaffed businesses.

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Inflation: Good for Annuities?

jberman — Sat, 17 Oct 2009 04:44:00 GMT

Main Street, October 15th, 2009

Supporters of annuity plans, who often bill them as "personal pensions," are touting their recession era durability and pushing for federal tax breaks they say will advance their adoption.

The economic downturn seems to have had no ill effect on the immediate annuity market, which saw sales increase 30% in 2008, even as financial markets crashed.

"It is the only segment of the annuity market that grew last year and that will continue," says Craig Hemke, president and founder of BuyAPension.com, a site where users compare and buy plans.

Concerns about rising prices and the diminished buying power of the dollar are helping to shape new annuity products, including offerings with payments that adjust for inflation, rather than the traditional Cost of Living Index.

"An adjustment that somewhat approximates inflation could be valuable for someone who is worried about it," Hemke says. "At the end of the day, the number one choice of immediate annuities is still 'life only' or 'fixed.' People just want as much income as they can."

Other products go beyond "life only" plans to ensure a benefit for beneficiaries.

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To Retire in This Weak Market, the Magic Word Is ‘Focus’

jberman — Sat, 17 Oct 2009 02:38:00 GMT

The New York Times, October 14th, 2009

MICHAEL SURRETT’S investment portfolio hasn’t fully recovered from the market crash, but that didn’t stop him from retiring three weeks ago.

“We are no different than anyone else in this economy,” said Mr. Surrett, 64, who lives in Valley Springs, Calif., with his wife, Shirley. “We have felt this greatly with the decline in stocks, bonds and mutuals. The key is planning and having our priorities set.”

For Mr. Surrett, who spent most of his career in institutional food services and procurement, his priority was swapping the stress of working for a quieter existence that allows him to spend less time in traffic and more with his family. He understands that he must rein in his spending to stretch his retirement savings, which he said are about 20 percent lower than he would like.

Diminished investment portfolios and declining home values have forced many people to delay their retirement plans. For many older Americans, reducing spending isn’t and won’t be a sufficient option — and they face the unfortunate reality of working longer.

But a number of people, like Mr. Surrett, are all too ready to move on to the next phase of their lives — even if it requires mastering the fine art of cutting back, as one financial adviser put it. This group has the financial resources and the motivation to manage the exchange of living standards for freedom, at least in theory.

But is the idea delusional? That’s where the hard work comes in: evaluating whether you can make the transition in this economy will require soul-searching, tough choices and a return to the thrift-minded ways of past generations. “It’s interesting to see how people can and do adjust to difficult situations,” said Robin Young, a financial planner with Northstar Financial Planning in Londonderry, N.H. “People are very resilient and get empowered by their own resourcefulness.”

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Loans That Looked Easy Pose Threats to Recovery

jberman — Fri, 28 Aug 2009 04:07:00 GMT

The New York Times, August 26th, 2009

When Harvey Clavon took out an exotic mortgage to refinance his home in Santa Clarita, Calif., three years ago, he thought he knew what he was doing.

Mr. Clavon, 63, was planning to sell the home in a few years and retire to Palm Springs. So he got a loan called an option adjustable rate mortgage, or option ARM, which allowed him to pay less than the interest for the first five years.

On his annual salary of $100,000 as a television camera operator, he could afford the $2,200 initial mortgage payments. And he planned to sell the home before the mortgage reset.

Now Mr. Clavon is part of what many economists say is a looming threat to a housing recovery: more than a half-million option ARMs scheduled to reset in the next four years, at rates many homeowners cannot afford. His mortgage payments have risen to $2,700 a month because of a clause he did not notice on his contract, and are scheduled to rise above $4,000 in two years.

Since February, default and foreclosure rates on option ARMs have passed those of subprime mortgages, according to the research firm First American CoreLogic, in part because so many subprime mortgages have already failed.

Because Mr. Clavon made only minimum payments on his mortgage, his balance has risen to $680,000 from $618,000, on a house worth closer to $400,000.

“I don’t know what I’m going to do, ” he said. “I got duped into the loan, and I consider myself an educated man.”

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Sales of Existing U.S. Homes Leap Higher

jberman — Sat, 22 Aug 2009 00:45:00 GMT

The New York Times, August 21st, 2009

Sales of previously owned homes surged in July as buyers stormed back to the market, taking advantage of falling prices, lower interest rates and a tax credit for first-time homeowners, an industry group reported on Friday.

Sales of condos and single-family homes each rose for the month, and the overall number of existing home sales rose 7.2 percent in July from June, the National Association of Realtors reported. It was the largest monthly gain since the group began tracking existing home sales in 1999.

Moreover, home sales last month were 5 percent higher than in July 2008. Homes were selling at a seasonally adjusted annual rate of 5.2 million in July, up from a rate of 5 million last year.

It was the first year-over-year increase in home sales since November 2005.

“I’m a little bit flabbergasted,” said Patrick Newport, an economist at IHS Global Insight. “These are really good numbers.”

Some 30 percent of the homes sold in July were distressed properties like short sales or foreclosures, but that is a lower percentage than in previous months, when nearly half of all existing-home sales were estimated to be foreclosures.

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Reverse Mortgages Come to the Rescue

jberman — Tue, 11 Aug 2009 09:07:00 GMT

Washington Post, August 10th, 2009

Reverse mortgages have been around for nearly 20 years, but it wasn't until the current financial crisis that they caught on. Seniors are turning to these loans to tap the equity in their homes and generate tax-free income to help them ride out hard times.

You can take it with you. A reverse mortgage can be a good option for people who want to relocate or move to a smaller home but don't want to sink all of their cash into a new house or might not qualify for a traditional mortgage.

New rules that took effect in January allow seniors to use a reverse mortgage to buy a new home. Say you own a house in Massachusetts worth $500,000 and you want to buy a $400,000 house in Florida. If you were to sell your house and pay cash for your new home, you'd have just $100,000 left to add to your savings. But if you took a $100,000 reverse mortgage on the Florida house, you'd have twice the amount left -- $200,000 -- to add to your savings.

How it works. You must be at least age 62 to take out a reverse mortgage. Plus, your house (current or future) must be your primary residence, and your mortgage must be either paid off or have a small balance. Unlike a traditional loan, there are no income or credit-score requirements, and you may use the money as you wish. The older you are, the higher the appraised value of your home (up to the maximum federal loan limit) and the lower the interest rate, the more you can borrow.

As part of the economic-stimulus package, Congress raised the reverse-mortgage loan limit to $625,500 through the end of 2009. After that, the lending limit reverts to $417,000, unless Congress intervenes.

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American Incomes Head Down, Threatening Recovery in Spending

jberman — Thu, 06 Aug 2009 09:09:00 GMT

Bloomberg, August 5th, 2009

Household income in the U.S. is weakening as the influence of the government’s stimulus plan wanes, prompting economists, Federal Reserve officials and a Nobel laureate to warn that consumer spending may struggle.

“Consumers have started to change their behavior and they are going to save more,” said Richard Berner, co-head of global economics at Morgan Stanley in New York and a former researcher at the Fed. “You have pressure on wages, you have employment still declining.”

Wages and salaries, which drive recoveries in spending, fell 4.7 percent in the 12 months through June, the biggest drop since records began in 1960, according to Commerce Department figures released yesterday. The Obama administration’s tax cuts, extended jobless benefits and a one-time Social Security bonus have helped mask the damage done by the worst employment slump since the Great Depression.

Personal incomes, which include interest income, dividends, rents and other payments as well as wages, tumbled 1.3 percent in June, more than forecast and the biggest drop in four years, yesterday’s Commerce report showed. Excluding the effects of the stimulus plan, June incomes would have dropped 0.1 percent after no change in May, according to the report. In May, one-time additional payments to Social Security recipients boosted incomes 1.3 percent.

One of every 10 American workers will be without a job by early 2010, economists project, shaking the confidence of those still on payrolls and discouraging spending. It may take as long as 15 years for consumers to fully repair finances battered by the decline in home values, stocks and employment, said Edmund Phelps, winner of the Nobel prize in economics in 2006.

Shrinking Net Worth

Decreasing pay is not the only hurdle for consumers. Plunging home prices and stocks reduced household net worth by a record $13.9 trillion from the third quarter of 2007 through this year’s first quarter, according to figures from the Fed.

“Households are going to have to do an awful lot of rebuilding of their wealth,” Phelps, a professor at Columbia University in New York, said this week in an interview on Bloomberg Television. “Even if that rebuilding goes on at a pretty good clip, it will take 12 or 15 years for households to get to the wealth level that they had several years ago. Consumer demand is going to take a long time to rebuild to normal levels.”

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Boomers, seniors have to rewrite their scripts for retirement

jberman — Thu, 23 Jul 2009 09:05:00 GMT

Detroit Free Press, July 22nd, 2009

Many people would rather talk about sex than about money, particularly if it means having to disclose that they don't have enough.

So it is with some reluctance and shame that many boomers-and-beyond are admitting their nest eggs have been scrambled, beaten to a weightless froth by an economy spun out of control.

Many, even those who considered themselves haves in a sea of have-nots, are chagrined to find they're members of a new class: the "hads." And the realization is sinking in that despite what they thought were all the right choices, they're having to rewrite their script for the future.

In early 2008, Larry Strunk, 66, of Whidbey Island, Wash., was actively managing his 401(k), day-trading oil stocks. "It was too much hassle," he recalls. "I put it into something I thought was very solvent" -- Washington Mutual Bank.

Strunk, a retired Boeing customer-service representative, planned on his 401(k) funding his yen for travel to exotic places. The bank's failure last fall, the largest in American history, put a hole in his pot of gold. His stock is worth pennies now.

For those who are at or beyond retirement age but still working, financial sinkholes have left many calculating that they may have to stay at it for a long, long time.

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Subprime Brokers Back as Dubious Loan Fixers

jberman — Tue, 21 Jul 2009 08:47:00 GMT

The New York Times, July 19th, 2009

From the ninth floor of a downtown office building on Wilshire Boulevard, Jack Soussana delivered staggering numbers of mortgages to homeowners during the real estate boom, amassing a fortune.

By Mr. Soussana’s own account, his customers fared less happily. He specialized in the exotic mortgages that have proved most prone to sliding into foreclosure, leaving many now scrambling to save their homes.

Yet the dangers assailing Mr. Soussana’s clients have yielded fresh business for him: Late last year, he and his team — ensconced in the same office where they used to broker mortgages — began working for a loan modification company. For fees reaching $3,495, with most of the money collected upfront, they promised to negotiate with lenders to lower payments on the now-delinquent mortgages they and their counterparts had sprinkled liberally across Southern California.

“We just changed the script and changed the product we were selling,” said Mr. Soussana, who ran the Los Angeles sales office of Federal Loan Modification Law Center. The new script: You got a raw deal, and “Now, we’re able to help you out because we understand your lender.”

Mr. Soussana’s partners at FedMod, as the company is known, were also products of the formerly lucrative world of high-risk lending. The managing partner, Nabile Anz, known as Bill, previously co-owned Mortgage Link, a California subprime lender, now defunct, that once sold $30 million worth of loans a month.

Jeffrey Broughton, one of FedMod’s initial partners, served as director of business development at Pacific First Mortgage, a lender that extended so-called Alt-A mortgages for borrowers with tarnished credit for Countrywide Financial, which lost billions of dollars on bad mortgages before being rescued in an acquisition.

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